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Nature and purpose of business
Definition of business
Any activity carried out with a view of regular production, purpose and sale of goods and services with the aim of earning of profits and acquiring wealth through the satisfaction of human wants.
The activities will refer to are those related to production and exchange of wealth i.e. economic activities. Some activities that involve working to create wealth such as occupations or employment do not strictly come in the scope of the meaning of business referred to above. Because business means different things to different people, we can be guided by certain characteristics to inform ourselves of whether we are dealing with a business activity or o not. These are given below.
Characteristics of businesses.
- Production of goods and services: Goods may be consumer or producer goods. Services are essentially intangible and do not result in ownership of anything by the consumer e.g. services provided by accountants, doctors, consultants, lawyers etc.
- Exchange motives (wealth): Business activities are directly or indirectly concerned with the transfer of goods and services for value. Any form of barter exchange (exchange of goods/services for goods/services) or activities like producing products for home consumption or personal use are not regarded as business.
- Regularity or continuity of dealings: The process of dealings in goods and services must be regular or continuous e.g. selling a single item like a phone or shoes occasionally is not business. When activities dealing in exchange of goods and services are regular, then it is likely that these are business activities aimed at creating wealth.
- Profit motive: Profit has been found to be a major reason (but not with Peter F Drucker) for a starting a business. To make profit a business must earn revenue that exceeds costs which is accomplished through the effective and efficient production and marketing of goods and services that consumers want. Profit is a reward for the entrepreneur or the premium for undertaking the risk. Therefore, where the profit motive is readily apparent in an activity, then this may be a business.
- Uncertainty of return: Though profit is the driving reward for any entrepreneur or risk taker, the nature of the activity may be such that it may result into a loss as a result of
factors beyond the entrepreneur’s control. If such is the case, then there is an element of risk and most businesses have this inherent characteristic.
Types of business
Businesses are broadly categorised as industry and commerce.
INDUSTRY: Refers to that part of business that is concerned with the production of goods and services. Typically, products from industry may be either consumer products (used by final consumers) or producer products (used by another industrial undertaking to produce other goods). Industry manifests itself in the following types best described using the different categories they fall in.
Classification of industries
- Primary industries: These deal in provision of natural products and include extraction and genetic industries
- Extraction industries; these are activities geared towards drawing out, extracting or raising various forms of wealth from the soil, air and water. The goods from such an activity may be used in construction and manufacturing or may be consumed directly like products from fishing and agricultural products.
- (^) Genetic industries; these engage in reproduction and multiplication of certain species of plants and animals with the objective of earning profits from the sale. Plant nurseries and cattle breeding firms are examples of such industries.
- Secondary industries: Deal in provision of artificial products i.e. man made products. They include capital, manufacturing and construction.
- Capital industries: These industries engaged in the production of heavy machinery like those producing earth-moving equipment. Companies like CAT are found in such industries.
- Manufacturing industries: such industries are involved in the conversion or transformation of raw materials to semi-finished products. These industries normally use products of extractive industries and examples of their output include soap, sugar, iron sheets, scholastic materials, cloth, beverages etc.
- Construction industries: these design, manufacture or construct a single substantial asset like a bridge, a building, a dam and roads. The outputs of such
- Insurance: this is an essential safe guard for the businessperson against the risk of loss inherent in the workings of the market economy commercial operations.
- Transport: this relates to the means through which products and services are moved from one place to another. In a market economy, this also involves the clerical, mental and manual occupation involved in the operations of rail, sea, air and road transport. This function contributes to commerce by enabling goods to be sent where they are wanted.
- Banking services: this is essential in transferring of money from the buyers to the sellers especially in long-distance transactions.
Other Aids
Commercial activities/operations are as well supported by other activities such as storage facilities like warehouses and professional services like those of auditors, lawyers, and marketers etc. all of which support trade.
PURPOSE OF BUSINESS
These have been broadly categorised as;
- Profits (economic)
- (^) Social responsibilities The economic objectives include: Creation of a customer; any product or service brought on the market is intended to satisfy the need of a customer. Peter Drucker believed that the only valid definition of business purpose to him is ‘to create a customer’. Unless there is a customer to buy the product of a business, it cannot exist to the extent that it is a customer that determines what a business is responding to his /her needs through buying the product, thereby keeping the business in existence. Making Profits: if you asked a typical businessman what a business is, he is likely to say that is an organisation to make profit. Even a typical economist is likely to answer like that. Such an observation would sadly be false and misleading; according to Drucker. This position has been augmented by Urwick who asserted that earning profits cannot be the objective of a business any more than eating is the objective of living. In addition, Henry Ford of Ford General Motors declared that mere chasing money is not business.
Never the less, classical economic theory of business enterprise and behaviour argues that the objective of a form is profit maximisation and although modern economists like Boumol and Joel Dean believe that profit is not the sole aim of business, they qualify profit maximisation as business objective in the long run. This leads to an acknowledgement by Drucker “profit is not an explanation, cause, or rationale of a business; it is a test of the validity of business behaviour and decisions”. Drucker goes on to say that, profit has two functions; first, it the first test of performance, which is the only effective test, but second, it is the premium for the risk of uncertainty. This gives rise to the other objectives.
Survival; for businesses to be going concerns in complete agreement with the characteristic of regularly and continuity of dealings, then profits must be made. A business needs to makes sufficient profits in order to survive in the long run and this make survival an important objective of business.
Growth; related to profits, every business wants to grow as an indicator that is profit making. Growth is natural to all activity and as such, as more money is invested and more and profits are made so does a firm grow.
Social objectives:
- (^) Employment
- Good relationship with your customers/reputation
- Good customer care
- Fair deal to labour
- Dividends-fair returns to investors
- Timely payments of loans and advances and taxes for government
- Protection of environments
- Quality products and services to customers
- Information disclosure regarding products
- Avoid unfair trade dealings-black marketing, hoarding of goods and misleading advertisements.
- Contribution to research/donations
The organisational boundary is no way a physical lining but an imaginary line that separates what is internal and external to itself.
Types of organisations
- profit motivated
- (^) Non-profit organisations
- Profit motivated organisations
A for- profit organisation exists primary to generate profit i.e. to take in more money than it spends. The owners may decide to keep all the profits to themselves or they can spend some or all of it on the business itself. Sometimes they may also decide to share some of it with employees though the use of various types of compensation plans e.g. employee profit sharing or bonus schemes.
- Non-profit organisations
These are set up without a profit motive. A non- profit organisation exists to provide a particular service to the community even though it may be at a fee e.g. hospitals, schools, orphanages etc. They are organised under rules that forbid the distribution of profits to owners and employees.
Similarities between profit and non-profit organisations
- Both NPOs and profit organisations may be private, public or non-governmental organisations with self-governing boards accountable to their owners or members.
- Both NPOs and profit organisations must operate for lawful purposes.
- (^) Both NPOs and profit organisations must be efficient and effective to survive.
Differences
- NPOs provide some public service or have some public purpose to that goes beyond serving the personal interests of the members of the NPO such as promotion of social
welfare, economic development, religion, charity, education and research while profit organisations operate for making profits.
- NPOs may make profits but they don’t distribute their profits to the members. They use any profits made to further their public interest objectives whereas profit organisations distribute profits to the members or owners.
- NPOs frequently do not generate enough income to cover all their expenses, so they fundraise from the public or donors. On the other hand, profit organisations frequently borrow money at a specified interest rate, if they cannot self-finance all their capital and operating costs. They calculate that they will be able to pay back on loan/ borrowed funds plus interest from the profits they intend to make.
- For the NPOs, on dissolution any surplus assets after payment of debts are given to an NPO with similar objectives. Assets are not distributed to the members whereas for the profit organisations, on dissolution, after payment of all debts any surplus assets are distributed to the owners or members.
ORGANISATIONAL STRUCTURES
To most people in business, an organisation implies a formalised structure of activities and positions. Two forms are identified:
- Formal Structures
This means intentional structures of roles, positions and activities. It shows how an organisation is formally organised and coordinated. The structure identifies levels of authority, functions, departments and relationships.
- Informal structures
In every formal organisation, there is alongside and informal structure. These are the relationships among members of the organisation that cannot be formally defined. People interact, create informal groups and share a lot in common that is not formally sanctioned by authority e.g. employee associations like MUBASA (Makerere University Business School Academic Staff Association).
Forms of business organisations
Sole proprietorship/one man business
Advantages:
▲ Direct motivation of unshared profits ▲ It is flexible ▲ Secrecy ▲ A sole proprietor has complete control and decision making power over the business ▲ Sale or transfer can take place at the discretion of the sole proprietor ▲ No corporate tax payments ▲ Few formal business requirements required in running the entity. ▲ Easiest type of business organisation to establish and dissolve. There are no formal requirements for starting a sole proprietorship. ▲ The start-up costs for a sole proprietorship are minimal.
Demerits
▲ Lack of collateral security therefore difficulty to borrow and lack of enough capital to expand. ▲ Poor decision making /limited managerial skills ▲ Demotivation because of unshared losses ▲ Poor or no book keeping ▲ Owner has unlimited liability. Both the business and personal assets of the sole proprietor are subject to the claims of creditors. ▲ Uncertainty of duration- Because a sole proprietorship is not a separate legal entity, it usually terminates when the owner becomes disabled, retires, or dies. As a result, the sole proprietorship lacks continuity and does not have perpetual existence like other business organisations. ▲ It is difficult for a sole proprietorship to raise capital. Financial resources are generally limited to the owner’s funds and any loans outsiders are willing to provide.
Conclusion
Sole proprietorship are only ideal where capital are small and risk isn’t too high, where quickness of decision making is very important, where customers need personal attention via taste and fashion.
PARTNERSHIPS
Limitations of a sole proprietorship prove to be a hindrance to the requirements of an expanding business hence the need for association of businesspersons.
Definition: this is an association of two or more people who agree to share profits of a business carried on by all or some on behalf of others. OR
It is a relationship, which exists between two or more people with a view of making profits.
Characteristics:
- Non transferability of interest
- Plurality of persons that is more than one i.e. banking 2-10 partners, any other businesses 2-20 partners
- Contractual agreement usually by a partnership deed
- Principal-agent relationship
- (^) Unlimited liability
Who can be a partner?
Anybody who is legally capable of contracting/ contractual capacity that is sane, financially sound can be a partner.
Formation of a partnership
It is created by a partnership agreement or the Partnership Act.
In Uganda, partnerships are registered under the partnership ACT 1932.
Partnership agreements
- By words of mouth (expression/ oral agreement)
- By writing (partnership deed)/ regulation
- Limited liability partnership (LLP): This is a partnership where all partners have limited liability i.e. they are not responsible for the debts and liabilities of the partnership. Not all businesses can register as LLP’s. LLP’s usually include Medical partnerships, Law firms, and Accounting firms.
Types of partners
- Active partners- participate actively in management of businesses and are liable to third parties. They are sometimes referred to as “ordinary”, “regular”, “actual”, or ostensible partners.
- Dormant/ Sleeping Partners- one who does not take any active part in the management of the businesses. He contributes capital and shares the profit which is usually less than that of the active partners. He is liable for all the debts of the firm but his relationship with the firm is not disclosed to the general public.
- Nominal/ Quasi- He/she neither contributes any capital nor shares in the profits or take part the management of the business. But he is liable to third parties like other partners. He/she is known to the outsiders and earns good will for using his name as a partner.
- Minor partner- a partner below the contracting age. Enjoys limited liability and his decisions are not legally binding.
- Partner in profits only- A partner who shares in the profits only without being liable of the losses. He does not take part in the active management of the business.
- Sub partners- This is a stranger sharing the profits derived from the firm. He/she shares profits with one of the partners and has no rights against the firm.
- Partner by Estoppel or Holding out- one who, without being a partner, conducts himself in such a manner as to lead third parties (outside world) to believe he is a partner. He is stopped or prevented from denying he is a partner. He is considered as a partner in the eyes of law and is liable to third parties. Similarly, if a person is declared to be a partner by a partnership firm and such a person remained silent without denying it, he is also considered a partner by holding out and is liable to third parties.
Advantages
- Going concern/ survival capacity if provisions are made.
- Increased capital
- Better management skill
- More access to credit
- Losses are shared /risks are spread
- Relatively easy to form and dissolve
- Few government regulations
- Relatively flexibility in management
- Relatively easy decision making
- Limited liability of some partners
Demerits
- Unlimited liability of some partners
- A mistake by a partner will affect other partners- risk of implied authority
- Less secrecy
- Relatively limited resources
- Non-transferability of interest (members expressly stated one cannot just move out his capital in favour of other business ventures).
- Relative delays in decision making
- Possibility of instability of business or lack harmony (conflicts)
- Limited continuity
- Demotivation- sharing of profits
When one member leaves for any reason say death or another person is admitted the partnership dissolves. This does not mean winding up the business. The dissolution occurs because terms of the new partnership will be different. The relationships are new e.g. capital contribution, profit and loss sharing ratio etc.
Termination of a partnership
- Voluntary association of a person in co-operation: Two or more persons come together voluntarily for the purpose of carrying on business and are incorporated under the companies Act.
- Artificial person: A company is an artificial person created by law. It is created by legal process and not by natural birth. Even though it has no natural personality, it has legal personality. Therefore it can enter into contracts, sue and can be used, own property, appoint employees and borrow money like any other natural person.
- Separate legal entity: Since the company is created by law, it has a separate legal existence compared to its members. Therefore the members cannot be personally held responsible for the acts of the company.
- Common seal: Since a company is an artificial person having no physical features like a natural person, it cannot sign. Hence every company by law must have a common seal on which its name is engraved. The common seal can serve as its signature. The common seal is affixed on all important documents and contracts which is witnessed by signature of two directors and countersigned by secretary wherever required. The common seal is kept under the custody of directors.
- (^) Limited liability: The liability of members of a company is limited to the face value of shares held by them or amount guaranteed. Their personal property cannot be seized to meet the company’s liability beyond the above mentioned liability.
- Transferability of shares: The capital required by the company may be raised by issue of shares. The member who holds the shares of a company can transfer its ownership to any other person, without the company’s permission. For public limited companies unlike private limited companies, shares can easily be sold and bought by the general public at stock exchange markets.
- Perpetual succession: Since the company has a separate existence from its members, directors and employees, their death, insolvency or insanity will not affect its life and existence, men may come and men may go but a company remains forever. It can be wound up under the provisions of the Act.
- Separation of ownership and management: In a company, the ownership and management are separated. The shareholders who are the owners do not take active part in the everyday affairs of the company. Instead, they elect their representatives
known as Directors, who with the help of managers and employees manage the company. Thus, there is division of labour and specialisation.
- Large membership: The Company is owned by a larger number of members- maximum of 50 in the case of private limited company and unlimited number of members in the case of a public limited company.
TYPES OF COMPANIES
These are classified according to their nature and origin and they basically include;
- Companies incorporated under royal charter/ special charter.
- Companies incorporated under the companies Act.
- Companies incorporated under statute/ Acts of parliament
1. COMPANIES INCORPORATED UNDER THE SPECIAL / ROYAL CHARTER
These are companies most of which originated from U.K under the permission of the queen of England with a royal / special charter. They started in early 16000 and the common ones were:
a. British South African Company (BSACo) b. Imperial British East African Company (IBEACo) c. British East Indian Company (BEICo)
These remained only historical and a new phase of companies under special/ royal charter has been formed. These include:
a. Association of Chartered Certified Accountants (ACCA) b. Institute of Chartered Secretaries and Administrators. (ICSA) c. Chartered Institute of Marketing (CIMA) d. Chartered Institute of Purchasing and Supply (CIPS)
2. COMPANIES INCORPORATED UNDER THE COMPANY’S ACT
- No limited number of members’ i.e. minimum number is 2 and maximum is infinity or no upper limit.
- It invites the numbers and the general public to subscribe/ buy its shares and debentures.
- It must hold a statutory meeting and file a statutory report
- It cannot commence business without a certificate of commencement of business allowing it to commence business. Examples of such companies include, E.A.B.L, Uganda Clays, Stanbic Bank, New Vision, D.F.C.U, Bank of Baroda, B.A.T etc. iii. GOVERNMENT COMPANIES Government can establish a company under the companies Act. Government companies incorporated under the companies Act are usually established as a joint ownership by the government and the private sector. These have the following features/ characteristics on addition to the general ones.
- The government must own 51% of the shares.
- They may possess any other feature of both limited companies and public limited companies. Examples of government companies include New Vision, Post Bank and Pride Microfinance. b. Companies limited by guarantee
These can be defined or describe by the following features
i. They are usually non trading business like clubs, associations, NGOs etc. ii. The members pay subscriptions fees rather than a board of directors for companies. iii. In case if liquidation, members guarantee to contribute up to a certain amount if assets don’t sufficiently cover the company’s debts.
Such companies include clubs, associations like KACITA, NGOs like Save the Children’s Fund, football clubs etc.
c. Unlimited companies
These are mostly multinational companies, they are not in Uganda and therefore the companies Act is silent about them.
3. COMPANIES INCORPORATED UNDER STATUTE / ACTS OF PARLIAMENT
These are also referred to as statutory corporations/ parastatals / public enterprises.
These are companies incorporated under a special statute that lays down the duties and obligations of the company and the specific laws that govern its activities such as companies are 100% owned by the government example include Bank Of Uganda (BOU), Post Bank ltd, Regulatory Bodies like U.R.A, Civil Aviation Authority, NSSF etc.
FORMATION PROCESS
a. Promotion
This refers to the process of exploration, investigation and the organisation of the necessary resources including financial, human and managerial ability with an objective of initiating a business.
An individual who thinks or conceives the business idea is called a promoter. The process of conceiving and translating an opportunity into a business is called promotion.
Entrepreneurs foresee gain through particular business opportunities and take steps to translate the opportunity into a business which must be registered as a company.
b. Registration or incorporation
At this stage, the company is given recognition by the law as a separate legal entity. Promoters intending to form a joint stock company are required to furnish the registrar of companies with the following:-
i. Memorandum of association ii. Articles of association, ( dully signed) iii. List of directors with details of names, addresses occupations, shares subscribe and statement of agreement to serve as directors. iv. A statutory declaration by an advocate or an attorney or nay other competent officer of the company that all the requirements of the companies Act, and rules there under have been complied with. This is in case of public limited companies.
